Beer Ties & Cobras

Beer Ties & Cobras

Anyone interested in pubs will be aware of the recent vote in Parliament which according to many journalists marked the end of the Beer Tie.

Actually, it didn’t mark the end of the Beer Tie but it does mean tenants of the large pub companies (those owning more than 500 pubs) will have the option of breaking their Beer Tie subject to certain conditions.

Whether this is a good idea for the tenant will depend on their circumstances. If they remain tied their rent will stay low and they will benefit from capex spend on their pub by the pub company. However, they will still have to buy their beer from the pub company at relatively high prices. If they break the tie their rent will go up and capex will be their responsibility, but they will have the option of buying beer at lower prices from other suppliers which in many cases will drastically reduce their cost of sales.

The best solution will depend on the pub, but at least the tenant has a choice. This seems to be the reason why almost every commentator sees the change as a thoroughly good thing.

However.

The Law of Unintended Consequences refers to actions which end up having the opposite of the intended effect. It’s also known as the “Cobra Effect”. This harks back to the age of British rule in India when an infestation of cobra snakes in Delhi led to the British offering rewards in exchange for dead cobras. Inevitably entrepreneurial locals began breeding cobras in huge numbers, killing them, and making a fortune in rewards. In the end the furious British ended the program and thereby rendered the newly-bred cobras useless. The Indians therefore released them onto the streets and the infestation was made even worse.

It’s interesting to wonder whether the change to the Beer Tie could have its own Cobra Effect.

For example, pub companies are unlikely to invest in pubs if their return is at risk if the tenant breaks the tie. Therefore, investment in pubs is likely to reduce and this could affect profitability – not to mention the fabric and attractiveness of the pubs. Indeed, leading mergers and acquisitions expert Peter Hansen, of Sapient Corporate Finance, has commented that the Wellington pub company (which has a mainly free-of-tie estate) has invested just £12k per pub in capex in the past six years and has suffered a 6% Compound Annual Growth Rate decline in Ebitda per pub. This is compared with Enterprise, Punch and Greene King (who have mainly tied pubs) who invested an average of £59k per pub and suffered only a 2% decline.

Furthermore, without investment from the pub companies, the barrier to entry for many aspiring publicans will be too high because they won’t have the cash to set the pub up on their own. This will leave a gap for wealthy businessmen who might not feel quite so passionate about the local community.

The notion that the large pub companies perhaps aren’t the evil conglomerates that many perceive is also supported by the fact that they are big buyers of cask ales produced by British-owned regional brewers. With the loss of the Beer Tie their buying power will reduce and the decisions will increasingly be made by tenants. Peter Hansen recalls the introduction of the Guest Ale Provision at the time of the Beer Orders in the early 1990’s: “Tenants bought their best-selling ale provided by their brewery rather than introducing a guest ale because that maximised their profits.”

Therefore, if this buying behaviour is repeated the big winners of this whole episode will be the national brewers, all of whom are foreign-owned.

Finally, if the purpose of the vote in Parliament is to help tenants then restricting the change to pub companies owning more than 500 pubs seems strange to say the least, because it’s not as though tenants of smaller pub companies hold any sort of advantage of tenants of large pub companies. Indeed, since smaller pub companies have less buying power their tenants often end up paying even more for their beer … so they would stand to benefit from a choice more than anybody!

For Ortus the change to the Beer Tie has a neutral effect … it presents both challenges and opportunities to the pub side of our business. However, anyone who thinks it will lead to wonderful traditional pubs popping up everywhere and prospering … well, they could be staring a Cobra in the face.